Just based on the near-term performance of Carvana (CVNA), it appears to have the makings of a powerful meme stock. Once the dust settled on the June 8 session, shares of the online auto retailer gained slightly over 56%. In the trailing five days, CVNA stock returned nearly 62% while on a year-to-date basis, it features a take-no-prisoners mentality, skyrocketing over 423%.
It’s a remarkable paradigm shift considering that in December of last year, Barchart’s Will Ashworth reported on the myriad troubles affecting Carvana. At the time, Ashworth mentioned that Wedbush Securities analyst Seth Basham downgraded CVNA stock to underperform. This assessment was based on the belief that “…any debt restructuring leading to bankruptcy would render Carvana’s shares worthless overnight.”
Obviously, a 420%-plus performance will at least create pause regarding the next approach for CVNA stock. Unfortunately, though, the intense retail sentiment for Carvana may be the equivalent of slapping fresh paint on a rundown vehicle. It might look good on the outside but the internals don’t provide much confidence. Therefore, investors should be extremely skeptical about overexposure to this troubled ride.
CVNA Stock Pops on Seemingly Encouraging Data
Nevertheless, it’s important to acknowledge the positives since few companies feature purely binary assessments. On Thursday morning, Carvana revealed that it expects to earn more than $6,000 in gross profit per used vehicle sold in the second quarter. Management also plans to report over $50 million in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), beating analysts’ forecasts.
Further, the company’s leadership team stated that if the auto retailer hits these numbers, they would represent the best gross profit margin per car metric it has ever reported. Notably, Thursday’s announcement undergirds a promise Carvana made in early May about reporting positive adjusted EBITDA and achieving positive free cash flow.
Adding to the accelerated sentiment for CVNA stock, Carvana CEO Ernie Garcia articulated that the company’s performance in Q1 and forecasted performance in Q2 demonstrate “that our strategy is working.”
Sure enough, traders in the derivatives market took great encouragement at the data, with CVNA stock becoming a key highlight on Barchart’s screener for unusual stock options volume. Specifically, total volume reached 770,614 contracts against an open interest reading of 556,311. As well, the delta between the Thursday session volume and the trailing one-month average metric came out to 427.69%.
Drilling down, call volume hit 508,905 contracts while put volume came out to 261,709 contracts. This pairing yielded a put/call volume ratio of 0.51, on paper favoring the bulls. With so much momentum backing CVNA stock, it’s tempting to scalp a quick bull trade. However, long-term investors will want to be extraordinarily cautious.
Carvana Works Against a Major Credibility Crisis
On surface level, the signs seem to point enticingly for CVNA stock. For example, the Barchart Technical Opinion indicator rates shares a 72% buy. And while the analyst assessment currently sits at hold, on many levels, it’s surprising that it’s not an outright consensus sell. Plus, two analysts presently rate CVNA as a strong buy. Despite these and other tempters, Carvana suffers from a financial credibility crisis.
Primarily, Carvana’s bonds are junk amid a rising interest rate environment. Therefore, what might be a speculative proposition in any other circumstance seems imprudent when investors can find much safer and still reasonably rewarding debt-based alternatives to gamble on.
Last year in April, Carvana turned to Apollo Global Management (APO) for $1.6 billion to salvage a bond-selling deal after other lenders spurned the online dealership. However, with a yield of 10.25%, this rate ranks well above the average for most junk bonds, according to The Wall Street Journal.
Another critical headwind centers on the balance sheet. As the WSJ pointed out last year, Carvana – by making the aforementioned deal – effectively admitted that it needed to fill fiscal holes rather than prioritize growth.
At the end of Q1 2023, Carvana’s long-term debt hit $6.55 billion, a staggering figure compared to its cash and cash equivalents account of only $488 million. In addition, the company continues to burn cash, presenting massive efforts in its quest to become FCF positive.
Certainly, the raised outlook for the gross profit margin per car metric would help close some of the gap. But it might not be enough to close it completely.
Unfortunately, the reality is that Carvana’s core business model of delivering cars to homes lost significant relevancy following the fading of the COVID-19 pandemic. Plus, with low price being the biggest concern for would-be car buyers, Carvana’s competitors may end up stealing market share. Therefore, conservative investors should stay away from CVNA stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
